What is Nonrecourse/Limited Recourse Lending?

Typically a project financing involves a loan to enable the sponsor to construct a project where the loan is “nonrecourse” or “llimited recourse” to the sponsor.

Nonrecourse means that the lender may not turn to the sponsor’s non-project related assets if the revenues generated by the project, SPE, or project collateral used to secure the loan are insufficient to cover the principal and the interest payments on the loan. The lender has recourse only to the project not the sponsor.

Limited recourse means that the sponsor remains liable for certain risks that the lenders are unwilling to accept. These could be the cost over-runs during construction, or the sponsor could take construction completion risk by remaining liable on the construction loans, with only the term (post construction) loans being nonrecourse.

To support nonrecourse or limited recourse financing, typically require:

SPE a special purpose entity

Separateness covenants to mitigate consolidation of SPE if there is a bankruptcy of a sponsor